FEDERAL COURT OF AUSTRALIA

Ziegler v Commissioner of Taxation [2025] FCAFC 168

ORDERS

THE COURT ORDERS THAT:

1.    The application is dismissed with costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ORDERS

THE COURT ORDERS THAT:

1.    The application is dismissed with costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

OVERVIEW

1    On 21 April 2009, Mr Ziegler and various entities that he controlled resolved numerous disputes with the Commissioner of Taxation by entering into a Settlement Deed. The disputes were described as the “Settled Affairs”, related to 22 persons and entities described as the “Ziegler Entities”, and concerned the taxation of amounts received by the Ziegler Entities between 1998 and 2004. The dispute was resolved on the basis that a single assessment would be issued to Orrong Strategies Pty Ltd for the 2008 income year, reflecting a settlement sum of $3,900,000, plus general interest charge (“GIC”), in settlement of the disputed taxation liabilities of all of the Ziegler Entities: cll 2(d) and 3.

2    On 21 July 2009, as contemplated by the Settlement Deed, the Commissioner issued Orrong an amended assessment for the 2008 income year. The assessment provided due dates and amounts payable of $550,000 on 20 August 2009 and $3,350,000 plus GIC on 21 July 2010. The amount of $550,000 was paid on time. The balance was paid early, in the 2010 income year.

3    After the Settlement Deed, Mr Ziegler and entities associated with him entered into various transactions which ultimately resulted in Mr Ziegler having the benefit of an imputation credit of $2,993,610 attached to a dividend paid to him by Orrong. Taking into account deductions to which Mr Ziegler considered he was entitled, and carried forward losses, Mr Ziegler received a refundable tax offset of $2,993,610.

4    The Commissioner was displeased by this turn of events. As he saw it, the outcome of the settlement, reflected in the Settlement Deed, was largely defeated because a substantial proportion of the $3,458,160.53 that Orrong paid to the Commissioner under the Settlement Deed was then paid to Mr Ziegler as a refundable tax offset of $2,993,610.

5    The Commissioner made a determination under s 177EA(5)(b) of the Income Tax Assessment Act 1936 (Cth) (“ITAA 1936”) that no imputation benefit was to arise. He sought to recover the refundable offset as an administrative overpayment pursuant to s 8AAZN of the Taxation Administration Act 1953 (Cth) (“TAA 1953”).

6    In addition to the foregoing, in respect of the 2009 year, Mr Ziegler had claimed under s 25-5(1)(c) of the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”), and was allowed, a deduction for GIC of $13,698,643. Mr Ziegler calculated the deduction by reference to the “Income Tax Account” kept by the Commissioner and accessible by Mr Ziegler’s tax agent on the Australian Taxation Office’s “Tax Agent Portal”. As a result of the settlement, the GIC was recalculated and credited by the Commissioner to Mr Ziegler’s Income Tax Account on 16 August 2010. Mr Ziegler returned the amount as assessable income. Mr Ziegler then took the position that the GIC credited to his Income Tax Account was not an assessable recoupment under s 20-20(3) of the ITAA 1997.

7    These events, described in summary form, gave rise to various assessments and objections, the detail of which is unnecessary to recount.

8    While deciding objections to penalty assessments made by Mr Ziegler and Wellton Holdings Pty Ltd, the Commissioner concluded that the correct operation of the relevant provisions in Sch 1 to the TAA 1953 was that penalties of 75% were imposed (with an uplift of 20% in relation to some assessments) rather than the previously notified 25%. Some of the shortfall amounts altered and some did not. Notices of penalty assessment reflecting the changed shortfall amounts (where applicable) and increased penalties of 75% (or 90%) were issued.

9    Mr Ziegler and Wellton commenced reviews under Pt IVC of the TAA 1953 in the Administrative Appeals Tribunal (“AAT”). The Tribunal made decisions in relation to the various reviews on 20 September 2024.

10    On 17 October 2024, Mr Ziegler and Wellton appealed to this Court, in its original jurisdiction, “on a question of law”. The applicants structured their arguments by reference to four “Grounds”:

(a)    Ground 1: Whether the Commissioner’s credit of GIC of $13,698,643 to Mr Ziegler’s Income Tax Account after the Settlement Deed was entered into – being GIC in fact deducted by Mr Ziegler in 2009 – was assessable under s 20-20(3) of the ITAA 1997.

(b)    Ground 2: Whether the Commissioner could assess or notify an increase in penalties after a notice of penalty assessment had been issued.

(c)    Ground 3: Whether the Tribunal erred in finding for the purposes of s 177EA(3)(e) of the ITAA 1936 that the requisite purpose of obtaining an imputation benefit existed.

(d)    Ground 4: Whether the Tribunal erred in: (a) concluding that it could not take purported breaches of the Settlement Deed by the Commissioner into account in reaching its decision about whether the assessments were excessive; and (b) failing properly to take the Settlement Deed into account, in particular when addressing the issues which arose in relation to the s 177EA determination.

11    For the reasons which follow – structured by reference to the four Grounds – the applications to this Court should be dismissed with costs.

GROUND 1

The issues and the relevant legislative regime

12    The applicants contended that the Tribunal erred in finding that GIC of $13,698,643 was an assessable recoupment within s 20-20 of the ITAA 1997. Section 20-20 of the ITAA 1997 provides:

20-20    Assessable recoupments

Exclusion

(1)     An amount is not an assessable recoupment to the extent that it is *ordinary income, or it is *statutory income because of a provision outside this Subdivision.

Insurance or indemnity

(2)     An amount you have received as *recoupment of a loss or outgoing is an assessable recoupment if:

(a)     you received the amount by way of insurance or indemnity; and

(b)     you can deduct an amount for the loss or outgoing for the *current year, or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act.

Other recoupment

(3)     An amount you have received as *recoupment of a loss or outgoing (except by way of insurance or indemnity) is an assessable recoupment if:

(a)     you can deduct an amount for the loss or outgoing for the *current year; or

(b)     you have deducted or can deduct an amount for the loss or outgoing for an earlier income year;

under a provision listed in section 20-30.

13    Section 20-25(1) relevantly defines “recoupment” in a broad and inclusive way as “any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described”:

20-25    What is recoupment?

General

(1)    Recoupment of a loss or outgoing includes:

(a)    any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and

(b)    a grant in respect of the loss or outgoing.

14    There was no dispute that Mr Ziegler claimed and was granted a deduction for GIC in the amount of $13,698,643 in the 2009 year. The deduction was claimed under s 25-5(1)(c) of the ITAA 1997, being a provision listed in s 20-30 as required by the closing words of s 20-20(3).

15    There was also no dispute that, after the Settlement Deed was entered into, the Commissioner credited GIC of $13,698,643 to Mr Ziegler’s Income Tax Account. The Commissioner’s position was that the credit of GIC was an assessable recoupment under s 20-20(3)(b) of the ITAA 1997.

16    The applicants contended that s 20-20(3) was not engaged because:

(a)    Mr Ziegler did not “receive” an amount as a recoupment for the purposes of s 20-20(3): AS[6]; ARS[7]. There must be an amount taken into the taxpayer’s hands or possession and a release from a liability does not satisfy this description: AS[12].

(b)    There was no GIC liability which could have been deducted in the 2009 year because:

(i)    the amended assessments issued in accordance with the Settlement Deed extinguished the earlier tax liabilities and, therefore, any tax shortfalls which gave rise to the GIC;

(ii)    the effect of s 172(1)(a)(i) of the ITAA 1936 was that previously accrued GIC was taken never to have been payable, such that – retrospectively – the GIC was neither deductible in 2009, nor assessable in 2011 as a recoupment: R[4]; [29].

(c)    The phrase “you have deducted” in s 20-20(3)(b) only refers to an amount lawfully deducted rather than an amount in fact deducted.

17    These arguments must be rejected for the following reasons.

Mr Ziegler “received” the GIC credit as a “recoupment of a loss or outgoing”

18    Mr Ziegler contended, as he did before the Tribunal, that debits and credits to the Commissioner’s “privately maintained accounts” or “literally … private accounts” have no legal consequences in and of themselves: T8–21; R[112]–[113].

19    The applicants’ reference to the Commissioner’s “private accounts” was a reference to the Income Tax Account maintained by the Commissioner and made available on the ATO’s Tax Agent Portal. Mr Ziegler – through his accountant and tax agent – used the Income Tax Account accessed via the Portal to calculate the GIC which he could and did claim as a deduction in the 2009 year. Although in his evidence Mr Ziegler described the Income Tax Account as an “RBA” (or “Running Balance Account”), it was common ground that the Income Tax Account was not an RBA established by the Commissioner pursuant to Pt IIB of the TAA 1953 – see: s 8AAZA (definition of “RBA”) and s 8AAZC.

20    When he claimed the deduction for GIC in the amount of $13,698,643 in the 2009 year, Mr Ziegler was liable for that GIC. The Income Tax Account reflected actual transactions concerning GIC as evidenced by Mr Ziegler’s claim for the deduction and the Commissioner’s acceptance of that claimed deduction. The deduction in respect of the 2009 year was a “loss or outgoing” within s 20-20(3).

21    After the amended assessments were issued as contemplated by the Settlement Deed, Mr Ziegler was entitled to a refund for the GIC for which he had been liable and which he had paid. The Commissioner credited the Income Tax Account to give effect to the recalculation of GIC payable. Mr Ziegler relied upon the credit in the Income Tax Account in returning the credit as assessable income in the 2010 year. Just as the GIC liabilities recorded in the Income Tax Account reflected actual transactions, so too the Commissioner’s credit to the Income Tax Account reflected an actual transaction. The Commissioner’s credit, returned by Mr Ziegler as assessable income, was “received as recoupment of a loss or outgoing” within the meaning of s 20-20(3) of the ITAA 1997, namely as a recoupment of the GIC which Mr Ziegler had deducted. Mr Ziegler’s argument that the amount was not received, because no amount of money came into his hands or possession, is not assisted by dictionary definitions of the meaning of the word “receive”: AS[6]. Section 20-20(3) must be read with the definition of “recoupment”. A “recoupment” is “any kind of recoupment” including “indemnity”, which might not include any actual receipt of money.

The amended assessment did not retrospectively extinguish earlier liabilities

22    The amended assessments did not operate retrospectively to deem Mr Ziegler not to have the tax liabilities which gave rise to the GIC he claimed in the 2009 year.

23    An amended assessment is not properly conceived of as the withdrawal of an earlier assessment and the replacement of that assessment by a new assessment. There is only ever one assessment, which – if amended – continues as altered by the amendment – see: R v Deputy Commissioner of Taxation; Ex parte Hooper [1926] HCA 3; 37 CLR 368 at 372 (Isaacs J); Federal Commissioner of Taxation v Hoffnung & Co Pty Ltd [1928] HCA 49; 42 CLR 39 at 54 (Knox CJ); Cadbury-Fry-Pascall Pty Ltd v Federal Commissioner of Taxation [1944] HCA 31; 70 CLR 362 at 381 (Latham CJ); NMRSB Ltd v Federal Commissioner of Taxation [1998] FCA 146; 81 FCR 378 at 401 (Sackville J); Chevron Australia Holdings Pty Ltd v Federal Commissioner of Taxation [2017] FCAFC 62; 251 FCR 40 at [148] (Pagone J, Allsop CJ and Perram J agreeing).

Section 172 of the ITAA 1936 creates a confined statutory fiction

24    Section 172 relevantly provided:

172    Refunds of amounts overpaid

(1)     Where, by reason of an amendment of an assessment, a person’s liability to tax (the earlier liability) is reduced:

(a)     the amount by which the tax is so reduced is taken never to have been payable for the purposes of:

(i)     provisions of this Act that apply the general interest charge; and

(ii)     Division 280 in Schedule 1 to the Taxation Administration Act 1953 (which applies the shortfall interest charge); and

(b)    the Commissioner must apply the amount of any tax overpaid in accordance with Divisions 3 and 3A of Part IIB of the Taxation Administration Act 1953.

…

(2)     In subsection (1), unless the contrary intention appears, tax includes the general interest charge under a provision of this Act, additional tax under Part VII and shortfall interest charge.

25    The evident intended operation of s 172(1) of the ITAA 1936, relevantly for present purposes, is to deem tax not to have been payable “for the purposes of” recalculating the amount of GIC payable. Section 172(1) creates a statutory fiction for a confined purpose. The statutory deeming operates only so far as is necessary to achieve that purpose – see: Minister for Immigration and Border Protection v Makasa [2021] HCA 1; 270 CLR 430 at [51]; Federal Commissioner of Taxation v Comber [1986] FCA 92; 10 FCR 88 at 96 (Fisher J).

26    The applicants relied upon the statement of Lord Asquith of Bishopstone in East End Dwellings Co Ltd v Finsbury Borough Council [1952] AC 109 at 132–3 that, if a statute “requires you to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it”. That statement might be true of a particular statute, but it does not accurately reflect Australian law. It is inconsistent with Makasa at [51] and was distinguished by Hill J in East Finchley Pty Ltd v Federal Commissioner of Taxation [1989] FCA 720; 90 ALR 457 at [90]–[91]. Section 172(1) contains a deeming provision for the purposes of (relevantly) calculating a refund. It is not a purpose of the confined deeming provision to go further and deem the underlying liability to be retrospectively extinguished.

27    In Lamesa Holdings BV v Commissioner of Taxation [1999] FCA 612; 92 FCR 210 at [104], Sackville J correctly observed (emphasis in original):

[Section] 172(1) does not provide that, upon the issue of an amended assessment reducing a liability to tax, the amount by which the tax is so reduced must be taken as never to have been payable. It is only taken never to have been payable for the purposes of provisions relating to the payment of interest and penalties by the taxpayer.

28    Contrary to the submission advanced by King’s Counsel on behalf of the applicants, this passage is not “helpful” to the applicants. The statement is not, as was submitted, to be read as confined to a statement about the amount of tax reduced: T31.28.

29    Further, contrary to the applicants’ alternative submission, Sackville J’s statement is not wrong. It is plainly correct – see also: ACN 005 057 349 Pty Ltd v Commissioner of State Revenue [2015] VSC 76; 100 ATR 817 at [104].

30    The applicants also relied upon [2.59] of the Explanatory Memorandum to the Tax Laws Amendment (Improvements to Self Assessment) Bill No 1 2005 (Cth) and to the Shortfall Interest Charge (Imposition) Bill 2005 (Cth). However, this too does not support the applicants’ argument. The relevant paragraph makes clear that “[s]hould the shortfall later be overturned, the general interest charge will be recalculated as if the unpaid shortfall amount (and related shortfall interest charge) had never existed” (emphasis added). The phrase “as if” directs one to undertake an exercise on a hypothetical (but factually incorrect) basis for a particular purpose, namely for the purpose of recalculating GIC such that a correctly calculated refund can be given.

31    Section 172(1) does not deem tax “never to have been payable”. It deems tax “never to have been payable for the [identified] purposes”. The Commissioner submitted that s 172(1) does not in any event apply to a penalty assessment because the word “assessment” in the chapeau should be understood as an assessment as defined by s 6(1) of the ITAA 1936. Given the conclusion reached, it is unnecessary to address whether that submission is correct or whether s 172(1) evinces a “contrary intention”.

Section 20-20(3) applies where a deduction is in fact claimed

32    An amount which is a recoupment of a loss or outgoing is assessable if “you have deducted or can deduct an amount” under a provision in s 20-30. Contrary to the applicants’ submission, s 20-20(3)(b) is engaged if – as a matter of fact – “you have deducted” an amount of GIC, whether or not the taxpayer was lawfully entitled to deduct the amount.

33    This was the dissenting view reached by Wigney J in Batchelor v Federal Commissioner of Taxation [2014] FCAFC 41; 219 FCR 453 at [106] and [108] in relation to s 20-20(2)(b) which concerns recoupment through “insurance or indemnity”, but which is relevantly analogous to s 20-20(3)(b) concerning “other recoupments”. It is not an evident purpose of s 20-20(2) or (3) that a taxpayer who has in fact been allowed a deduction for a loss in an earlier income year, although not lawfully entitled to it on the correct operation of the relevant provisions, should be able to make a windfall gain if he or she subsequently recoups the loss by way of insurance or indemnity (s 20-20(2)) or other recoupment (s 20-20(3)). The obvious purpose of s 20-20 is to bring such recoupments into assessable income to unwind the deduction, whether it was obtained in the current or an earlier income year. This purpose is not advanced by importing a requirement that the deduction has been lawfully or properly claimed; on the other hand, it is advanced by the ordinary meaning of the words used, read in context.

34    The contrary view expressed in obiter dicta by Edmonds and Pagone JJ in Batchelor at [16] was based on their Honours’ view that s 20-20(2) of the ITAA 1997 was a rewrite of s 26(j) of the ITAA 1936, expressed in different words. The significance of their Honours’ observation lies in s 1-3 of the ITAA 1997 which provides:

1-3    Differences in style not to affect meaning

(1)    This Act contains provisions of the Income Tax Assessment Act 1936 in a rewritten form.

(2)    If:

(a)    that Act expressed an idea in a particular form of words; and

(b)    this Act appears to have expressed the same idea in a different form of words in order to use a clearer or simpler style;

the ideas are not to be taken to be different just because different forms of words were used.

35    Section 26(j) of the ITAA 1936 provided:

26    Certain items of assessable income

The assessable income of a taxpayer shall include:

…

(j)    any amount received by way of insurance or indemnity for or in respect of any loss:

(i)    of trading stock which would have been taken into account in computing taxable income; or

(ii)    of profit or income which would have been assessable income;

if the loss had not occurred, and any amount so received for or in respect of any loss or outgoing which is an allowable deduction;

36    Little assistance is gained by comparing s 20-20(2) of the ITAA 1997 with s 26(j) of the ITAA 1936. Even less assistance is gained by then comparing s 20-20(3) with s 26(j). It is an oversimplification to state that s 20-20(2) is a rewrite of s 26(j) of the ITAA. Subdiv 20-A of the ITAA 1997 consolidated 23 recoupment provisions in the then existing law into one place – see: Explanatory Memorandum, Tax Law Improvement Bill 1996 (Cth) at 36. The Explanatory Memorandum explained that “[t]he consolidation of differing rules has necessitated some changes”, which were then addressed. Further, s 26(j) did not use the term “recoupment” at all. Section 20-20 is significantly broader in operation than s 26(j). Section 20-20 of the ITAA 1997 does not just express ideas from s 26(j) of the ITAA 1936 in a different form of words.

37    The applicants advanced three further arguments in support of their contention that the deduction must be one to which Mr Ziegler was lawfully entitled before s 20-20(3) could operate to render a recoupment of the deduction assessable.

38    First, the applicants argued that a plain reading of the phrase “have deducted or can deduct” in s 20-20(3), together with the definition of “deduct” in s 995-1(1) of the ITAA 1997, leads to the conclusion that the deduction must have been lawful: AS[28].

39    The applicants’ argument was as follows. The word “deduct” has the meaning given by ss 8-1 and 8-5: s 995-1(1). Sections 8-1 and 8-5 set out the circumstances in which a taxpayer “can deduct” amounts from assessable income. Those sections do not contemplate an “unlawful” deduction. The word “deducted” has a meaning corresponding to the word “deduct”: Acts Interpretation Act 1901 (Cth) s 18A. It follows that the phrase “have deducted or can deduct” in s 20-20(3)(b) must refer to amounts which satisfy the requirements of either ss 8-1 or 8-5 and have been “lawful” deductions.

40    This argument must be rejected. The definitions in s 995-1(1) apply “except so far as the contrary intention appears”. The object of ss 8-1 and 8-5 is simply to identify what can be deducted. The object of s 20-20 is clear, as is the language in s 20-20(3). The provision is intended to bring into assessable income a recoupment of something which has in fact been claimed as a deduction. Its language in no way supports a conclusion that it is confined in operation to a deduction which was lawfully or properly obtained.

41    Secondly, the applicants rely on the word “under” in s 20-20(3) as supporting a conclusion that a deduction must have been lawful: AS[29]. The applicants observed that, in Margarula v Northern Territory of Australia [2016] FCA 1018; 257 FCR 226 at [387]–[389], Mansfield J stated that there were two senses in which one can speak of doing an act “under” an enactment: “pursuant to” and “by virtue of”. The applicants submitted that the phrase “under a provision” in s 20-20(3) stands in contrast to other sections of the ITAA 1997 that use phrases such as “purported compliance” of a provision when referring to an act being purported to be done in compliance with a provision but where the requirements of the provision are not satisfied: AS[30].

42    This argument must also be rejected. The deduction was claimed “under” a relevant provision, namely under s 25-5(1)(c) of the ITAA 1997. The deduction was lawfully claimed when it was claimed. It was allowed. The deduction did not become unlawful because of a later extinguishment of tax liabilities to which the GIC related, but even if it had the deduction would still have been claimed “under” a relevant provision. It is the words of the statute which matter, but – even if one adopted the explanatory language “pursuant to” or “by virtue of” – the same conclusion follows.

43    Thirdly, the applicants referred to the broader statutory context as supporting a conclusion that a deduction must have been lawful: AS[31].

44    The argument was as follows. Subdivision 20-A is headed “Insurance, indemnity or other recoupment for deductible expenses”. The Guide to s 20-20 refers to “a deductible expense”: s 20-10. If a taxpayer has an “assessable recoupment” (under s 20-20), ss 20-35 to 20-55 set out how much is included in assessable income. Section 20-35 is headed “If the expense is deductible in a single income year”, s 20-40 is headed “If the expense is deductible over 2 or more income years” and s 20-50 is headed “If the expense is only partially deductible”. Sections 8-1 and 8-5 contain notes that refer to Subdiv 20-A as applying in respect of “deductible expenses”.

45    The applicants submitted that the references to “deductible expenses” in the headings, Guide and notes demonstrated that it was not Parliament’s intention for s 20-20(3) to be engaged where an amount is incorrectly returned and assessed as a deduction. According to the applicants, if the words “have deducted” in s 20-20(3) are regarded as ambiguous, a meaning which is consistent with the headings must be adopted.

46    The applicants’ third argument must be rejected. Headings form part of the ITAA 1997 (see s 950-100(1)) and are part of what is considered in construing a relevantly connected provision. Because of their necessarily summary nature, headings do not convey the full operation of the relevant provisions, and they can sometimes be misleading – see: Commissioner of Taxation v Patrix Prestige Pty Ltd [2024] FCAFC 148; 306 FCR 56 at [19] (Thawley, Wheelahan and Kennett JJ). Notes also form part of the Act (see s 950-100(1)) and are relevant in construing the Act. A “Guide” (see s 950-150(1)), whilst forming part of the Act (see s 950-100(1)), can only be used for the limited purposes identified in s 950-150(2).

47    A consideration of the various headings, the Guide, the note and extrinsic material do not lead to a conclusion that the applicants’ construction of s 20-20(3)(b) should be preferred. The applicants’ construction departs from the plain and unambiguous language used and is inconsistent with the evident object of the provision.

GROUND 2

The issues

48    Two penalty notices were issued to Mr Ziegler for the 2011 and 2012 years and four to Wellton for the 2011 to 2014 years. These recorded administrative penalties at 25% of the relevant shortfall amounts: R[11], [31], [51(f)].

49    The applicants objected. In his objection decisions, the Commissioner took the view that the rate of administrative penalty should have been 75%, with a 20% uplift in relation to some years. The view that penalties were imposed at 75% was taken because the Commissioner concluded that the shortfall amount resulted from intentional disregard of a taxation law.

50    After the Commissioner’s objection decisions, penalty notices were issued to the applicants recording the increased administrative penalties for the relevant income years at 75% (or 90%) of the shortfall amounts: R[11], [205], [329]. The shortfall amounts did not alter in relation to Mr Ziegler, but were less in respect of each of the four notices to Wellton.

51    The Commissioner’s contention before the Tribunal (as it was initially on this appeal) was that the relevant notices under s 298-10 of Sch 1 were varied “under” s 33(3) of the Acts Interpretation Act and that they were “not issued pursuant to the Commissioner’s power on objection under s 14ZY(1) of the TAA”: ABC at 355 [413].

52    The Tribunal followed Greenwood J’s decision in Aurora Developments Pty Ltd v Commissioner of Taxation (No 2) [2011] FCA 1090; 196 FCR 457 at [116]–[119] concluding (R[156(c)], [157]–[159]) that:

(a)    s 298-10 conferred a power to make, grant or issue an instrument – a notice of penalty assessment – of an administrative character within the meaning of s 33(3) of the Acts Interpretation Act;

(b)    properly construed having regard to s 2 and s 33(3) of the Acts Interpretation Act, s 298-10 authorised amendments to a notice of penalty assessment.

53    After a question was raised by the Court before the hearing of the appeals, the Commissioner’s primary contention became that the statutory obligation or duty to assess administrative penalties contained in s 298-30(1) of Sch 1 was one which was not “spent” as soon as an assessment was made and that it continued after notice of a penalty assessment under s 298-10 had been given. The Commissioner contended that this construction of the assessment power in s 298-30(1) was supported by s 33(1) of the Acts Interpretation Act.

54    The applicants submitted that:

(a)    section 14ZY empowers the Commissioner to allow an objection in whole or in part or to disallow the objection, but contains no express power to increase a penalty assessment at objection and should therefore be construed as placing limitations on the Commissioner’s powers: AS[41];

(b)    once the Commissioner has exercised his power under s 298-30 of Sch 1 and made a penalty assessment, his power is spent and, subject to another statutory power enabling him to do so, he cannot resile from his position once first formed: AS[43];

(c)    there is no power to amend a notice given under s 298-10 and, in any event, the amendment of such a notice would leave the underlying assessment undisturbed, referring to Boulos v MRVL Investments Pty Ltd (No 2) [2021] FCA 309 at [55] (Thawley J).

55    The applicants contended that s 14ZY of the TAA 1953 and s 298-30 of Sch 1 conveyed an intention contrary to the application of either s 33(1) or (3) of the Acts Interpretation Act.

The decision in Aurora (No 2) is incorrect

56    In Thomas v Federal Commissioner of Taxation [2015] FCA 968; 101 ATR 576 at [573], Greenwood J stated:

As to the amendment power, the Court in Aurora determined that the Commissioner has power to amend a penalty assessment pursuant to both s 14ZY of the TAA [1953] and s 33(3) of the Acts Interpretation Act.

57    Aurora (No 2) is better understood as having decided, albeit incorrectly for the reasons given below, that: (i) s 14ZY of the TAA 1953 confers an implied power to amend a penalty assessment; and (ii) s 33(3) of the Acts Interpretation Act confers a power to amend a notice of penalty assessment.

58    It is convenient to address first Greenwood J’s erroneous conclusion in Aurora (No 2) that s 33(3) of the Acts Interpretation Act “has the effect of conferring a power to repeal, rescind, revoke, amend or vary any instrument consisting of a notice of assessment determining the amount of penalty and the due date for penalty”: Aurora (No 2) at [118]. Section 33(3) of the Acts Interpretation Act provides:

Power to make instrument includes power to vary or revoke etc instrument

(3)    Where an Act confers a power to make, grant or issue any instrument of a legislative or administrative character (including rules, regulations or by-laws) the power shall be construed as including a power exercisable in the like manner and subject to the like conditions (if any) to repeal, rescind, revoke, amend, or vary any such instrument.

59    By its express terms, s 33(3) of the Acts Interpretation Act is a statutory direction about construing a power conferred by another statute. Section 33(3), like s 33(1), does not confer a power and cannot alter the power spelt out in the terms of the provision conferring the power. If authority were needed for that proposition, it may be found in Makasa at [45].

60    Greenwood J also erred in concluding that Div 284 conferred a power to “issue a notice of penalty assessment” and that such a notice gives rise to an entity’s rights to object and, if dissatisfied, seek “review in the relevant forum”: at [116]–[117]. Division 284 does not confer a power to issue a notice of penalty assessment. In Div 298, s 298-30(1) obliges the Commissioner to make an assessment of penalties. Section 298-30(2) gives an entity dissatisfied with the assessment the right to object under Pt IVC of the TAA 1953. Section 298-30 provides:

298-30    Assessment of penalties under Division 284 or section 288-115

(1)    The Commissioner must make an assessment of the amount of an administrative penalty under Division 284 or section 288-115.

(2)    An entity that is dissatisfied with such an assessment made about the entity may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953.

61    The Commissioner also has an obligation, imposed on him by s 298-10, to notify the entity of the liability to pay the penalty, being the liability that arises because of the assessment. Section 298-10 provides:

298-10    Notification of liability

The Commissioner must give written notice to the entity of the entity’s liability to pay the penalty and of the reasons why the entity is liable to pay the penalty. The Commissioner is not required to give reasons if he or she decides to remit all of the penalty.

Note:    Section 25D of the Acts Interpretation Act 1901 sets out rules about the contents of a statement of reasons.

62    An entity which receives a notice reflecting an assessment with which they are dissatisfied may challenge the assessment as excessive, not the notice: s 298-30(2).

63    As is explained further below, if the Commissioner, having made an assessment of penalties under s 298-30(1), reaches the view that the assessment is incorrect, then the Commissioner must continue his obligation of assessment under s 298-30(1) and notify the liability to pay the penalty under s 298-10. By way of example, new information may come to the Commissioner which indicates that the penalties were over-stated. This might occur, for example, because the taxpayer provides further information to the Commissioner that the taxpayer was following reasoned and reasonable advice of a legal or tax professional. By way of further example, new information might indicate to the Commissioner that penalties were under-stated. A taxpayer dissatisfied with the assessment as altered may object by reason of s 298-30(2).

64    Greenwood J’s second erroneous conclusion in Aurora (No 2) was that s 14ZY of the TAA 1953 gives the Commissioner power to amend a penalty assessment: at [119].

65    Section 14ZY(1) of the TAA 1953 provides:

14ZY    Commissioner to decide taxation objections

(1)    Subject to subsection (1A), if the taxation objection has been lodged with the Commissioner within the required period, the Commissioner must decide whether to:

(a)    allow it, wholly or in part; or

(b)    disallow it.

66    Section 14ZY does not expressly or impliedly confer a power to amend a penalty assessment. Section 14ZY applies to all taxation objections, including assessments of tax. The power to amend a tax assessment as a result of an objection is conferred by item 6 in s 170(1) of the ITAA 1936. There is no equivalent express power in relation to assessments of administrative penalties. Contrary to Aurora (No 2), s 14ZY does not contain an implied power to amend a penalty assessment.

Section 14ZY does not impliedly limit the Commissioner’s power to increase penalties

67    The applicants submitted that the power in s 14ZY is essentially the exercise of an adjudicative function which is intended to be final, subject to statutory review and appeal rights: AS[48].

68    In the usual case, a taxpayer on objection will be seeking a reduction in an assessment. The Commissioner may allow such an objection or disallow it. The Commissioner would then issue an amended assessment to give effect to the decision. Section 175A(3)(a) expressly permits a taxpayer to object against an assessment if the taxpayer is seeking an increase in the taxpayer’s liability. If such an objection were allowed, an amended assessment increasing the taxpayer’s liability would be issued to give effect to the decision on objection under s 14ZY.

69    Section 14ZY contains no express or implied limitation on the Commissioner’s power to issue an assessment for an increased amount after the objection process. In the present case, the Commissioner disallowed the objection against the imposition of penalties at 25%. While determining the objections, the Commissioner formed the view that the correct application of the relevant provisions of Sch 1 in fact resulted in the imposition of penalties at 75%, with a 20% uplift in relation to some years. Section 14ZY(1) does not contain any express or implied limitation on the Commissioner from acting on that view if otherwise authorised to do so.

The Commissioner’s powers to assess or notify are not spent once first exercised

70    The liability to a penalty and the base amount of that penalty are imposed by Sch 1 to the TAA 1953 by reference to the happening or existence of certain prescribed events – see: ss 284-75(1), 284-85 and 298-20 of Sch 1; Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50; 212 FCR 483 at [239] (Griffiths J).

71    Section 298-30(1) requires the Commissioner to make an assessment of any penalty imposed by Sch 1 and s 298-10 requires the Commissioner to notify the taxpayer of the liability.

72    Nothing in ss 298-10 or 298-30, or in the statutory scheme more generally, suggests that, once a penalty assessment is made or a penalty notice is issued, the Commissioner’s powers in relation to either are “spent” as contended by the applicants. In that regard, although resort to it is unnecessary, s 33(1) of the Acts Interpretation Act provides:

Powers, functions and duties may be exercised or must be performed as the occasion requires

(1)    Where an Act confers a power or function or imposes a duty, then the power may be exercised and the function or duty must be performed from time to time as occasion requires.

73    If, on objection, the Commissioner considers that the operation of the relevant provisions is such that the amount originally notified is wrong, then the Commissioner must continue to exercise the assessment power in s 298-30(1), and must then issue a notice under s 298-10 of the entity’s liability to pay the penalty and (subject to an exception not presently relevant) of the reasons why the entity is liable to pay the penalty. This is not the exercise of any power furnished by s 14ZY of the TAA 1953. It is the exercise of the functions in s 298-30(1) and s 298-10 of Sch 1.

74    The duty (and power) to assess in s 298-30 is one which the Commissioner must perform as occasion requires. In the context of a self-assessment tax regime in which information within the knowledge of taxpayers might come to the Commissioner at various times, and in which the assessment of the tax liabilities on which the penalties are based might change from time to time, the legislature could not be taken as having intended that the duty to assess penalties was spent as soon as it was first exercised. This construction would leave taxpayers with overstated penalty assessments in the undesirable situation of needing to appeal to this Court or seek review in the Tribunal rather than have the Commissioner correct the overstatement.

75    An “assessment” under s 298-30(1) is not an “assessment” within the meaning of s 6(1) of the ITAA Act 1936. An “assessment” within the meaning of s 6(1) is the “ascertainment” of taxable income and the tax payable on that taxable income (see also the definition of “assessment” in s 995-1(1) of the ITAA 1997). An assessment of this kind can be amended under s 170 of the ITAA 1936. Subdivision 155A in Sch 1 to the TAA 1953 provides for the making of assessments of an “assessable amount” as defined in s 155-5(2), which include amounts such as a “net amount” under the A New Tax System (Goods and Services Tax) Act 1999 (Cth). Subdivision 155B in Sch 1 provides for the amendment of such assessments.

76    An assessment of administrative penalties flowing from a “shortfall amount” (see s 284-80 in Sch 1), calculated by reference to “a tax-related liability” (see s 255-1 in Sch 1), is not an assessment to which the amendment powers in s 170 applies or to which subdiv 155B applies.

77    The absence of an express power of amendment in the TAA 1953 in relation to penalties – which may be contrasted with the express powers of amendment in relation to ‘primary’ tax – should not be understood to reflect a legislative intent that no amendment power exists in relation to penalty assessments. Assessments of administrative penalties flow from assessments of primary liabilities to tax, including assessments under ss 166 and 167 of the ITAA 1936 and assessments under s 155-5(1) of Sch 1. In many ways, the amendment of penalties is controlled by the amendment powers and time limits which apply to assessments of primary tax liabilities because it is those assessments which might lead to a “shortfall amount” – or change in shortfall amount arising from an amended assessment of the primary tax – on which the administrative penalty is calculated. It is perhaps for this reason that Sch 1 does not contain express powers of amendment or time limits on the power to assess administrative penalties under s 298-30(1), especially given the wide and diverse range of primary tax assessments to which penalties may apply. As to time limits, the power in s 298-30(1) might be controlled by an implicit condition that it be exercised reasonably or within a reasonable time.

78    In those circumstances, s 298-30(1) should not be read – contrary to s 33(1) of the Acts Interpretation Act (and see s 2 of that Act) – as conferring a power which is exhausted by its first exercise. Nothing in the language of s 298-30, or in the statutory context or extrinsic materials, suggests that the power is exhausted once first exercised. To the contrary, given the statutory context and practical operation of the assessment and objection provisions, s 298-30(1) must be construed as requiring the Commissioner to make an assessment if he considers an earlier assessment incorrectly reflects the operation of the provisions imposing the penalty. The Commissioner must then notify the increased penalty liability under s 298-10. The taxpayer has a right to object to the underlying assessment under s 298-30(2).

Ground 2 is not made out

79    The Commissioner disallowed the applicants’ objections under s 14ZY, assessed the applicants under s 298-30(1) to penalties which were higher than previously assessed and notified the applicants of the re-stated liabilities under s 298-10. The Commissioner had power to assess the increased penalties under s 298-30(1) and to notify the liability to pay the penalty under s 298-10. Whilst the Commissioner’s view that penalties had been incorrectly assessed was apparently formed during the objection process, the power to assess did not stem from s 14ZY of the TAA 1953. The applicants objected to the increased penalty assessments as they were entitled to do by s 298-30(2). The Tribunal had jurisdiction to review the relevant objection decisions.

80    Ground 2 is not made out.

GROUND 3

The events after the Settlement Deed was entered into

81    As mentioned, on 21 April 2009, Mr Ziegler and the various Ziegler Entities, including Orrong, entered into the Settlement Deed under which Orrong agreed to pay $3,900,000 plus GIC to the Commissioner. The following events then occurred:

(a)    On 19 June 2009, Mr Ziegler as the sole director of Mirnlight Enterprises Pty Ltd – then the sole shareholder of Orrong – caused the two ordinary shares in Orrong to be transferred to himself, such that Mr Ziegler became Orrong’s sole shareholder. This is the sole step which comprises the Commissioner’s scheme.

(b)    On 20 June 2009, Orrong, Wellton and Mr Ziegler entered into Deeds of Assumption under which Mr Ziegler assumed the obligations of Orrong to pay principal and interest to Wellton under a Credit Facility Agreement.

(c)    On 26 June 2009, Pierce Bay Pty Ltd – the directors of which were Mr and Mrs Ziegler – entered into a Deed of Cancellation. Under the Deed of Cancellation, Pierce Bay cancelled 24,476,464 options to purchase T-class preference shares in Pierce Bay that had been issued to Mr Ziegler: R[267]. The cancellation of the T-class preference shares in Pierce Bay was said to increase Pierce Bay’s retained earnings for the 2009 income year by $24,476,464.

(d)    On 25 June 2010, Pierce Bay resolved to make a “Subvention Payment” to Orrong in an amount equivalent to Pierce Bay’s retained earnings at 30 June 2010 ($24,595,341): R[35]–[36], [267]. Mr Ziegler said the “Subvention Payment” was to compensate Orrong for “taking one for the team” by entering into and fulfilling its obligations under the Settlement Deed which settled the tax dispute for the whole group: R[35]–[36].

(e)    On 25 June 2010, Mr and Mrs Ziegler, as the directors of Orrong, resolved that Orrong would pay, on or before 30 June 2010, a fully franked dividend of $3,492,546 on each of the two issued shares in Orrong which had been transferred to Mr Ziegler on 19 June 2009.

(f)    On 28 June 2010, Orrong paid $3,458,160.53, due for payment on 21 July 2010 under the notice of assessment issued pursuant to the Settlement Deed. This generated a franking credit in Orrong’s franking account.

(g)    On 30 June 2010, Mr and Mrs Ziegler, as directors of Pierce Bay, executed a “Deed of Subvention Payment” under which Pierce Bay undertook to pay the Subvention Payment to Orrong on demand. This was said to result, for accounting purposes, in a corresponding increase of $24,868,192 in Orrong’s sundry income and receivables at 30 June 2010.

(h)    On 30 June 2010, Orrong declared the envisaged fully franked dividend of $3,492,546 per share (a total of $6,985,092) payable to Mr Ziegler as Orrong’s sole shareholder.

82    The consequences of these events were that Mr Ziegler (T268):

(a)    had the benefit of an imputation credit of $2,993,610 attached to the dividends; and

(b)    received a refundable tax offset of $2,993,610 from the Commissioner consequent upon his claiming deductions for the obligations under the Deeds of Assumption and carried forward losses.

83    The payment of the refundable tax offset to Mr Ziegler was not well received by the Commissioner’s officers: R[269]. In the Commissioner’s view, the outcome of the Settlement Deed was largely defeated because a substantial proportion of the $3,458,160.53 that Orrong paid to the Commissioner pursuant under the Settlement Deed was paid to Mr Ziegler as a refundable tax offset of $2,993,610: R[269].

84    The Commissioner made a determination under s 177EA that no imputation benefit was to arise – see: s 177EA(5)(b). This cancelled the imputation benefit of $2,993,610 in respect of Mr Ziegler for the 2010 income year. The Commissioner sought to recover that amount as an administrative overpayment pursuant to s 8AAZN of the TAA 1953.

Summary of the legislative regime

85    Section 177EA(3) comprises an exhaustive statement of the jurisdictional facts that are necessary and sufficient for s 177EA to apply so as to found an exercise of power by the Commissioner to deny a franking credit under s 177EA(5)(b): Mills v Federal Commissioner of Taxation [2012] HCA 51; 250 CLR 171 at [59] (Gageler J, French CJ, Hayne, Kiefel and Bell JJ agreeing). It provides:

(3)    This section applies if:

(a)    there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and

(b)    either:

(i)    a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests; or

(ii)    a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be; and

(c)    the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and

(d)    except for this section, the person (the relevant taxpayer) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and

(e)    having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit.

86    The expression “relevant circumstances” in s 177EA(3)(e) has a meaning affected by s 177EA(17), which sets out what relevant circumstances (non-exhaustively) “include” in 11 subparagraphs, the last of which incorporates the eight matters referred to in s 177D(b)(i).

87    A s 177EA determination does not form part of an assessment: s 177EA(5). However, s 177EA(9) allows a relevant taxpayer who is dissatisfied with a s 177EA determination to object against the determination in the manner set out in Pt IVC of the TAA 1953.

The issues

88    There was no dispute between the parties that s 177EA(3)(a) to (d) were satisfied. The dispute concerned s 177EA(3)(e). The applicants contended that the Tribunal ought to have found that s 177EA(3)(e) was not satisfied with the result that the s 177EA determination was invalid.

89    The applicants’ principal arguments centred around three contentions:

(a)    first, that the Tribunal erred in finding that there was a scheme for the purposes of s 177EA(3)(a);

(b)    second, that the Tribunal erred by analysing the purpose of the scheme rather than the purpose of persons who entered into or carried out the scheme; and

(c)    third, that the Tribunal erred when applying s 177EA(3)(e) by focussing on Mr Ziegler’s purposes when his purposes should have been excluded by s 177EA(4).

90    The applicants also contended, with some overlap with Ground 4, that the Tribunal misunderstood or ignored the Settlement Deed.

91    Finally, the applicants also raised three arguments in written submissions which they did not address orally:

(a)    first, that the Tribunal erred in its treatment of “commercial purposes”;

(b)    second, that the Tribunal erred in considering the relative time over which the transferred shares were held and dividends in respect of them were paid; and

(c)    third, that the Tribunal erred in concluding that there was no evidence that the Subvention Payment was paid.

It was permissible for the scheme to comprise one step

92    Section 177EA(3)(a) requires that there exist “a scheme for a disposition of membership interests … in a corporate tax entity”. The meaning of “scheme for a disposition” is provided by s 177EA(14). The scheme upon which the Commissioner relied consisted of one step which fell within the terms of s 177EA(3)(a), namely:

On or around 19 June 2009, Mr Ziegler authorised the transfer of M[i]rnlight’s shares in Orrong to himself, thereby becoming the sole shareholder of Orrong.

93    The surrounding transactions and relevant circumstances have been set out at [81] above.

94    While the relevant scheme must be one for the disposition of a membership interest to satisfy s 177EA(3)(a), the objective conclusion regarding the purpose of a person entering into or carrying out the scheme must be determined by reference to “relevant circumstances of the scheme”: s 177EA(3)(e). It is not necessary to identify the relevant circumstances as part of the scheme, contrary to what appeared to be at least implicit in the applicants’ submissions.

95    The relevant circumstances of the scheme upon which the Commissioner relied were exhaustively telegraphed to the applicants during the objection process and before the Tribunal hearing, including in opening submissions. The applicants made clear in their oral submissions on these appeals that there was no complaint made about procedural fairness.

The Tribunal’s reference to “the purpose of the scheme” does not demonstrate error

96    The applicants contended that the Tribunal erred in its application of s 177EA(3)(e) by considering “the purpose of the scheme”, referring to R[273], [275], [279]: AS[68].

97    As noted above, s 177EA(3)(e) turns on whether “it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme” did so for the required statutory purpose of obtaining an imputation benefit. This statutory formulation directs attention to the purpose of persons carrying out the scheme, not the purpose of the scheme as such – see, in the analogous context of s 177D: Commissioner of Taxation v Hart [2004] HCA 26; 217 CLR 216 at [37], [63] (Gummow and Hayne JJ).

98    The Tribunal understood and applied the correct statutory test. In addressing the statutory framework at R[252] to [258], the Tribunal summarised the parties’ agreed position at R[254], stating that “s 177EA(3)(e) requires an objective determination of whether it would be concluded that one or more persons who entered into or carried out the scheme or any part of the scheme did so for a purpose of enabling the relevant taxpayer to obtain the imputation benefit”. In the first two paragraphs under the heading “The purpose requirement – s 177EA(3)(e)”, the Tribunal made it clear that the relevant purpose was that of “a person who entered into or carried out a scheme”: R[263]–[264].

99    The Tribunal then came to addressing the applicants’ submissions. The Tribunal quoted [267] of the applicants’ Statement of Facts, Issues and Contentions (“SFIC”) in which the applicants contended that s 177EA(3)(e) could not be satisfied because of what the Tribunal should conclude was the purpose of the scheme: R[272]. The Tribunal then addressed the applicants’ contention, occasionally referring to the “purpose of the scheme”. This directly engaged the applicants’ contention – see, eg: R[273].

100    The Tribunal’s shorthand (but strictly inaccurate) references in other parts of its reasons to the “purpose of the scheme” does not lead to the conclusion that the Tribunal misdirected itself, less still in a way which gives rise to a question of law within the meaning of s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (“AAT Act”) or s 172 of the Administrative Review Tribunal Act 2024 (Cth).

Section 177EA(4) does not exclude Mr Ziegler’s purposes

101    As mentioned, the applicants contended that s 177EA(4) “operates such that it cannot be concluded that s 177EA(3)(e) is satisfied on the basis of Mr Ziegler’s purposes”: AS[70].

102    The applicants submitted that Mr Ziegler’s purposes must be excluded from the analysis, because the scheme only involves Mr Ziegler acquiring the two shares in Orrong. The applicants relied on Mills at [59]–[60].

103    Mills concerned the PERLS V Tier 1 capital raising issued by the Commonwealth Bank of Australia in 2009. The High Court held that s 177EA(3)(e) was not satisfied because a reasonable person would conclude that the Bank carried out the scheme for a purpose of enabling taxpayers who became PERLS V security holders to obtain franking credits and that purpose was incidental to the purpose of raising Tier 1 capital. A purpose can be incidental even where it is central to the design of a scheme if that design is directed to the achievement of another purpose: Mills at [66]. Gageler J endorsed as accurately reflecting the enacted statute the statement in the relevant Explanatory Memorandum that “[a] purpose is an incidental purpose when it occurs fortuitously or in subordinate conjunction with another purpose, or merely follows another purpose as its natural incident”: at [27], [64].

104    In Mills at [44], Gageler J stated that it was uncontroversial before the Federal Court that s 177EA(4) operated to make irrelevant any purpose of the taxpayers in that case. At [60], Gageler J observed (emphasis added):

The conclusion a reasonable person would draw in answer to the question statutorily posed by s 177EA(3)(e) will therefore, for most capital raisings, be the jurisdictional fact on which the application of s 177EA will turn. The conclusion to be drawn under s 177EA(3)(e) “having regard to the relevant circumstances” of the scheme of capital raising is a conclusion as to a purpose of one or more persons who entered into or carried out that scheme. Those persons necessarily include the issuer and, by operation of s 177EA(4), necessarily exclude investors who do no more than become holders of the equity interests created by the issuer. If the conclusion drawn is that the issuer or some other person entered into or carried out the scheme, or some part of it, “for a purpose … of enabling” a holder to obtain a franking credit then the jurisdictional fact to which s 177EA(3)(e) refers will exist and s 177EA will apply unless the conclusion to be drawn is that the issuer’s purpose of enabling a holder to obtain a franking credit is “an incidental purpose”.

105    The applicants’ contention that Mr Ziegler’s purposes must be excluded from the analysis cannot be accepted for at least two reasons:

(a)    first, s 177EA(4) does not operate by directly excluding a person’s purpose from the analysis required by s 177EA(3)(e);

(b)    secondly, s 177EA(4) only operates to exclude a conclusion that the relevant purpose exists “merely because the person acquired membership interests … in the entity”.

106    Section 177EA(4) provides:

It is not to be concluded for the purposes of paragraph (3)(e) that a person entered into or carried out a scheme for a purpose mentioned in that paragraph merely because the person acquired membership interests, or an interest in membership interests, in the entity.

107    Justice Gageler’s statement at [60] was about the practical operation of s 177EA(4) on the facts of that case. His Honour’s statement was not a statement that s 177EA(4) operates in every case to exclude the purposes of the recipient of membership interests from the analysis required by s 177EA(3)(e). Section 177EA(4) operates according to its terms. On its terms, it is not about excluding a person’s purpose. It excludes the possibility of finding the existence of the relevant purpose under s 177EA(3)(e) on the “mere” existence of one fact (the acquisition of membership interests).

108    The word “merely” in s 177EA(4) is significant. The only involvement of the security holders in Mills was as subscribers for the PERLS V securities. The scheme was devised and carried out by the bank and others. The operation of s 177EA(4) in those circumstances was uncontroversially (Mills at [44]) that the purpose of the investors could not be relevant because they did “no more than become holders of the equity interests created by the issuer”: Mills at [60].

109    On no sensible view was Mr Ziegler in an equivalent position to an investor in PERLS V securities who did “no more than become holders of the equity interests created by the issuer”. Mr Ziegler, as the sole director of Mirnlight, caused the two ordinary shares in Orrong to be transferred to himself. It should also be noted that the applicants’ contention that Mr Ziegler was the only person who entered into or carried out the scheme is inaccurate in that the scheme must be understood as involving Mirnlight and Orrong.

The Tribunal did not misunderstand or ignore the Settlement Deed

110    The applicants submitted that the Tribunal erred in its application of s 177EA(3)(e) because it “failed to grasp the nature of the bargain reached by the parties to the Settlement Deed and the impact the Settlement Deed has on assessing Mr Ziegler’s purpose”: RS[72]. According to the applicants, the Tribunal failed to grasp that the dividend from Orrong was contemplated by the Settlement Deed: RS[73]–[75].

111    This issue concerned the applicants’ contention before the Tribunal that (R[272]):

[I]t would be objectively concluded that [the] purpose [of the scheme] was enabling [Mr Ziegler] to obtain the benefit of the 2010 Franking Credit by means of the 2010 [Orrong] Dividend, in accordance with, and as contemplated and allowed by, the Settlement Deed.

112    The Tribunal did not make a finding of fact about whether the dividend from Orrong was contemplated by the Settlement Deed. Rather, the Tribunal assumed, for the sake of argument, “that the dividend and obtaining of the franking credit were [both] contemplated by the deed”: R[273]. On that assumption, the Tribunal concluded that Mr Ziegler nevertheless had a not merely incidental purpose of obtaining an imputation benefit within the meaning of s 177EA(3)(e) even if it would be concluded that the purpose was to obtain the benefit of the franking credit in accordance with the Settlement Deed or otherwise – see: R[273]–[274].

113    It was not suggested to the Tribunal that the only way in which the Settlement Deed could be given effect was by taking the step relied upon by the Commissioner as constituting the relevant scheme. Properly understood, the Tribunal’s conclusion was that the purpose of obtaining the imputation benefit was established as one within s 177EA(3)(e) even if the step was also permissible under (or “contemplated and allowed by”) the Settlement Deed. That is, the Tribunal assumed the relevant contended fact in the applicants’ favour.

114    The Tribunal is not shown to have erred in reaching its conclusion in a way which gives rise to any question of law.

The treatment by the Tribunal of “commercial purposes”

115    The applicants submitted that the Tribunal’s statement at R[289] that there was no “other commercial purpose … suggested by the objective evidence” revealed two errors (AS[76]):

(a)    The first error was said to be that it falls into a false dichotomy between rational commercial decisions and obtaining an imputation benefit. The applicants referred to Hart at [51] and Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC 28; 302 FCR 52 at [60].

(b)    Secondly, the applicants contended that the Tribunal failed to pay proper regard to the Settlement Deed. The Settlement Deed was said to suggest a commercial purpose of Mr Ziegler entering into or carrying out the scheme, being the settlement of complex and uncertain tax positions of the Ziegler Entities.

116    The Tribunal’s reasons must be read fairly as a whole. The sentence about which complaint is made is in the following paragraph (R[289]):

Nor, in my view, could it be said that the obtaining of the imputation credit was incidental to another purpose of transferring the shares. No other commercial purpose is suggested by the objective evidence. Rather, the evidence, particularly the timing of events outlined above, suggests the purpose of the transfer of the shares was to obtain the refundable tax offset. In any case, a conclusion that that was a not-incidental purpose of the transfer is open and almost irresistible in the circumstances. [Mr Ziegler] has not identified objective evidence to support a contrary conclusion.

117    The Tribunal did not make an error of the kind described in (a) above. Having earlier addressed the applicants’ contention that the purpose was one of enabling Mr Ziegler to obtain the benefit of the franking credit by means of the dividends from Orrong “as contemplated and allowed by” the Settlement Deed, it is tolerably clear that the sentence in R[289] about “other commercial purposes” is concerned with the absence of any commercial purpose to which the purpose of obtaining an imputation benefit could be said to have occurred in “subordinate conjunction” in the manner described in Mills at [64] – see [103] above.

118    Nor did the Tribunal make the error referred to in (b) above. The applicants’ complaint mostly devolves into the complaint addressed earlier in the sense that the Tribunal concluded that the s 177EA(3)(e) purpose existed whether or not the transactions which led to the imputation benefit were contemplated or allowed by the Settlement Deed.

119    In any event, the Tribunal had regard to the existence of the Settlement Deed, together with all the various contextual circumstances and transactions within which the scheme identified by the Commissioner occurred. The Tribunal’s conclusion in respect of s 177EA(3)(e) was reached after “[e]xamining the relevant circumstances globally” (R[290]–[303]), including the timing of relevant events: R[284]–[285], [289], [302]. At [287], the Tribunal:

(a)    observed that the various contextual transactions were internal to the Ziegler group which was under the effective control of Mr Ziegler and that the “objective evidence does not suggest a commercial reason for the transactions other than the generation of tax benefits, including the refundable tax offset arising from the payment of the franked dividend and the deductions said to have been generated by these [contextual] transactions”;

(b)    rejected Mr Ziegler’s explanation of the Subvention Payment as being to compensate Orrong for “taking one for the team”, noting that it was: (i) far in excess of the tax liability assumed by Orrong and any value that could rationally be attributed to other obligations under the Settlement Deed; and (ii) in any event, only payable on demand.

120    The applicants submit that the Tribunal ought to have concluded that Mr Ziegler entered into or carried out the scheme for the purpose of implementing the Settlement Deed: AS[75]. The Tribunal concluded that, even if this was the case, s 177EA(3)(e) was satisfied. The Tribunal concluded that Mr Ziegler entered into the scheme to generate tax benefits: R[287]. This was an unsurprising conclusion on the facts as found. In any event, the applicants’ complaint is ultimately one about findings of fact and does not raise any question of law.

The Tribunal did not err in considering timing or s 177EA(17)(i)

121    The applicants submitted that: (a) s 177EA(17)(i) permitted reference only to absolute periods of time, not comparative or relative periods of time; and (b) the Tribunal erred by comparing the period of time during which Mr Ziegler’s owned the Orrong shares with the period of time during which Mirnlight owned those shares: AS[77].

122    Section 177EA(17)(i) provides that one of the relevant circumstances to which regard must be had in reaching the conclusion about purpose required by s 177EA(3)(e) is “the period for which the relevant taxpayer held membership interests, or had an interest in membership interests, in the corporate tax entity”.

123    The Tribunal expressly stated that the factor in s 177EA(17)(i) was neutral if considered in an absolute sense rather than a relative sense”: R[296]. The Tribunal continued by observing that it was not irrelevant that Mirnlight had held the shares since 2004 and, in that period, Orrong had not declared any dividends: R[297]. The Tribunal concluded that “[r]elative to this long period of ownership, without any dividends being paid, [Mr Ziegler’s] short period of ownership before the franked dividend was paid points in favour of the requisite purpose.

124    Even if s 177EA(17)(i) is to be understood in the confined way contended by the applicants, the numerous matters in s 177EA(17) are non-exhaustively stated. The Tribunal evidently considered the relative periods of ownership and dividend history to be probative of the ultimate question as to purpose: Mills at [61]. It was open to the Tribunal to take these matters into account in undertaking the statutory task.

125    In any event, s 177EA(17)(i) should not be construed in the narrow way contended by the applicants given the provision is non-exhaustively expressed and the purpose of s 177EA is one of preventing abuse of the imputation system: Mills at [27], [58].

126    The applicants observed that Mr Ziegler held the Orrong shares for over one year before Orrong declared a dividend and submitted that this “does not point towards Mr Ziegler having entered into or carried out the Commissioner’s articulated scheme for a purpose of obtaining an imputation benefit”: AS[77]. This complaint amounts to no more than a disagreement with the significance of one of the facts or the inference to be drawn from the established facts. It raises no question of law within the meaning of s 44 of the AAT Act.

The Subvention Payment

127    The applicants contended that, when considering s 177EA(17)(ga), the Tribunal erroneously stated that “it is notable that there is no evidence that [the Subvention Payment] was actually paid”: R[301]; AS[79]. The applicants submitted that there was evidence before the Tribunal that the Subvention Payment was paid, namely: (i) bank statements recording the payment of the Subvention Payment and (ii) evidence from Mr Ziegler to that effect.

128    This complaint was not addressed orally and should perhaps be understood as having been abandoned. It was common ground at the hearing that the Subvention Payment was only in fact paid in 2020, a decade after the relevant transaction pursuant to which it was said to be payable, and at a time when the Ziegler Entities were in dispute with Commissioner: T123.

129    Section 177EA(17)(ga) provides that one of the relevant circumstances to which regard is to be had in reaching the conclusion about purpose required by s 177EA(3)(e) is “whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is sourced, directly or indirectly, from unrealised or untaxed profits”.

130    The Tribunal observed at R[301] that Mr Ziegler approached his submissions concerning s 177EA(17)(ga) on the footing that the dividend was sourced directly or indirectly from the subvention payment of $24,595,341 from Pierce Bay to Orrong.

131    The Tribunal then stated (footnote omitted):

[301]    … If ‘unrealised’ in s 177EA(17)(ga) means not actually paid, it is notable that there is no evidence that it was actually paid. I need not decide whether it takes that meaning because, despite [Mr Ziegler]’s submission to the contrary, I am not persuaded in any case that the ‘payment’ was taxed. In that regard, [Mr Ziegler] says the Commissioner’s submissions that it was not taxed ‘overlook the tax return lodged by [SOPL] for the year ended 30 June 2010 where all income including that received under the Subvention Payment was declared’. I accept the amount was ‘declared’ but a note to the return relevantly states:

Item 7Q: Other income not included in assessable income

… The amount of income not included in the taxpayer’s assessable income listed in Item 7Q of the taxpayer’s income tax return is $28,574,801 and comprises an amount of $24,595,341 owing by [PBPL] to the taxpayer …

[302]    I am not satisfied on the evidence drawn to my attention that the dividend was not sourced directly or indirectly from an untaxed source. Accordingly, I am not persuaded that [Mr Ziegler]’s submission that this factor points against the requisite purpose conclusion is correct. Even if it is, the other timing factors indicated above would support a conclusion that the requisite purpose existed.

132    The applicants did not submit that the reference to there being “no evidence” that the Subvention Payment was actually paid had any material effect on the Tribunal’s lack of persuasion that the dividend was not sourced from an untaxed source. Assuming the Tribunal erred in stating that there was no evidence that the Subvention Payment was actually paid, the applicants have not established that the factual error gives rise to any question of law.

133    It follows that Ground 3 is not made out.

GROUND 4

The issues

134    By Ground 4, the applicants contended that the Tribunal erred in not considering the terms of the Settlement Deed in determining whether: (i) the assessments under review were excessive; and (ii) the s 177EA determination should have been made.

135    The second issue has been addressed earlier. The Tribunal took the Settlement Deed into account in relation to the s 177EA determination in a way which was not shown to give rise to any question of law.

136    As to the first issue, the substance of the applicants’ contention is that excessiveness of an assessment can be established by proving in the Tribunal that the Commissioner departed from or breached the Settlement Deed or, perhaps, applied the tax laws in a way which was inconsistent with the Settlement Deed. The applicants submitted that the Commissioner had “agreed, for valuable consideration, to exercise his general power of administration on a particular view of the taxing statutes” and that the applicants “can prove excessiveness and discharge [their] burden of proof by reference to the Commissioner’s agreed administration of the substantive taxation provisions”: ARS[32].

137    This contention must be rejected for the following reasons.

The statutory concept of “excessive” and the taxpayer’s onus of proof

138    The term “excessive” in s 14ZZK and 14ZZO relates to a taxpayer’s substantive liability: WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation [2008] HCA 33; 237 CLR 198 at [6]; McAndrew v Commissioner of Taxation [1956] HCA 62; 98 CLR 263 at 271, 274–5 (concerning s 190(b) of the ITAA 1936). “Excessiveness” is not demonstrated by establishing some defect in the “procedure or mechanism” by which an assessment is made: WR Carpenter at [6]; McAndrew at 274–5. An assessment may be shown to be “excessive” if the correct application of the statutory provisions to the facts is such that the tax liability is overstated and it may extend to the situation in which an assessment is “made in purported but not justifiable exercise of a statutory power” such that the assessment was not authorised: McAndrew at 282.

139    Section 14ZZK of the TAA 1953 provides:

On an application for review of a reviewable objection decision:

(a)    the applicant is, unless the ART orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and

(b)    the applicant has the burden of proving:

(i)    if the taxation decision concerned is an assessment—that the assessment is excessive or otherwise incorrect and what the assessment should have been; or

(ii)    in any other case—that the taxation decision concerned should not have been made or should have been made differently.

140    This provision applies to Pt IVC reviews in the Tribunal. Section 14ZZO provides an equivalent provision applicable to Pt IVC appeals to a court. It is s 14ZZK(b)(i) which is relevant to the applicants’ first contention, namely that the Tribunal erred in not considering the terms of the Settlement Deed in determining whether the assessments under review were excessive. Section 14ZZK(b)(ii) is relevant to the second contention, addressed earlier, that the Tribunal should have taken the Settlement Deed into account in determining whether the s 177EA determination should not have been made.

141    In order to establish that an assessment is “excessive”, a taxpayer must show what the assessment should have been; it is not sufficient of itself to point to some error: s 14ZZK(b)(i). This was the position even before ss 14ZZK and 14ZZO were amended to make express reference to the taxpayer’s burden of proof extending to “what the assessment should have been” – see, for example: Trautwein v Federal Commissioner of Taxation [1936] HCA 77; 56 CLR 63 at 88. In Commissioner of Taxation v Dalco [1990] HCA 3; 168 CLR 614 at 621, Brennan J observed that “the purpose of the procedure of assessment, objection and appeal or review is to ascertain the true tax liability of the taxpayer under the substantive provisions of the Act”. His Honour later emphasised that the issue is not whether the grounds of objection have been made out but whether the amount assessed as taxable income is wrong:

It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed (s 199) unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong.

Excessiveness cannot be established by proving departure from the Settlement Deed

142    The Commissioner has a statutory obligation to administer the tax laws. A long line of established authority makes clear that the Commissioner cannot bind himself by administrative practice or by contract to give the tax laws an operation which they do not have – see, for example: Federal Commissioner of Taxation v Wade [1951] HCA 66; 84 CLR 105 at 117 (Kitto J).

143    It is unnecessary to address at length the many decisions confirming that position – see, for example: Minister for Immigration, Local Government and Ethnic Affairs v Kurtovic [1990] FCA 19; 21 FCR 193, 211–6 (Gummow J); Bellinz v Commissioner of Taxation [1998] FCA 615; 84 FCR 154 at 169 (Hill, Sundberg and Goldberg JJ); Daihatsu Australia Pty Ltd v; Deputy Commissioner of Taxation [2000] FCA 1658; 182 ALR 239 at [53], [54] (Lehane J); Re Minister for Immigration and Multicultural Affairs; Ex parte Lam [2003] HCA 6; 214 CLR 1 at 21–2 [66]–[69] (McHugh and Gummow JJ); Plaintiff S10/2011 v Minister for Immigration and Citizenship [2012] HCA 31; 246 CLR 636 at [65] (Gummow, Hayne, Crennan and Bell JJ); Minister for Immigration and Border Protection v WZARH [2015] HCA 40; 256 CLR 326 at [28]–[30] (Kiefel, Bell and Keane JJ).

144    The applicants advanced a number of submissions directed to establishing that excessiveness might be established otherwise than by reference to substantive liability, ultimately in support of the proposition that excessiveness might be demonstrated by reference to (contended) departures from the Settlement Deed.

145    First, the applicants referred to the observation of Brennan J in Dalco at 624 that an appeal of an assessment can be confined to part of the taxpayer’s liability. The applicants submitted that, under his general power of administration, the Commissioner can agree to confine a Pt IVC dispute to a specific point of law or fact, and that the taxpayer can discharge its burden by proving only that point “regardless of whether or not the points conceded are correct under the substantive tax law”: ARS[31].

146    The observation of Brennan J in Dalco at 624 was in these terms:

If the Commissioner and a taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it will suffice for the taxpayer to show that he is entitled to succeed on that point.

147    The applicants’ submission misunderstands the point which Brennan J was making. His Honour was addressing what is ultimately a matter of case management. If, in a Pt IVC review in the Tribunal or appeal to the Court, the taxpayer and the Commissioner agree that excessiveness turns on a particular identified issue or issues, then the taxpayer can establish excessiveness by satisfying the taxpayer’s onus of proof on the issue or issues in dispute. Excessiveness is established because the parties to the litigation have accepted that, apart from the issues in dispute, the taxpayer’s liability is correctly reflected in the assessment. There is no need for non-issues to be determined by the Tribunal or Court. This point was made by Derrington J in Commissioner of Taxation v Ross [2021] FCA 766; 85 AAR 194 at [48(10)]:

There may be cases where the amount of taxable income depends upon the legal complexion of known facts or upon specific factual questions. In such a case, a taxpayer may successfully discharge the onus by establishing that the Commissioner included in their taxable income amounts which ought not to have been included: Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 624. However, such a situation would only arise where the Commissioner agrees to a process which is different to that described above by confining the scope of the dispute between him and the taxpayer to certain enumerated amounts. One might expect some clear expression of that agreement …

148    Secondly, the applicants referred to s 357-60(1) of Sch 1 which provides for a ruling to be binding on the Commissioner in certain circumstances: ARS[29]. The appellants argued that this shows that a taxpayer can discharge its burden “by reference to the Commissioner’s stated administration of the substantive taxation provisions”: ARS[30].

149    Section 357-60(1) does not assist the applicants. Section 357-60(1) affects the outcome of a Pt IVC review or appeal precisely because it is a substantive provision which affects the taxpayer’s liability. If s 357-60(1) applies, such that the Commissioner is bound by a ruling, then an assessment which states the relevant liability inconsistently with the ruling is excessive no matter what otherwise would have been the taxpayer’s substantive liability determined by reference to other provisions of the tax laws. In such circumstances, the assessment would be shown to be excessive because of the substantive operation of the applicable statutory provision, namely s 357-60(1), not because of some form of estoppel or agreement.

150    A taxpayer’s liability is determined according to the operation of the tax laws, not by contractual promises made by the Commissioner, nor by his conduct in the administration of the tax laws, unless the tax laws give those promises or that conduct some statutory consequence for the taxpayer’s substantive liability as occurs, for example, in the situation where a ruling binds the Commissioner.

151    The Settlement Deed cannot affect the substantive tax liability of the applicants in the way contended by the applicants. That is not to say that the Settlement Deed could not be taken into account in the way it was by the Tribunal in considering the issues which arose under s 177EA.

Relevance of any contractual breach of the Settlement Deed

152    The applicants referred to the fact that the Tribunal suggested that the applicants might have a contractual remedy for any breach of the Settlement Deed by the Commissioner: ARS[36]; R[77], fn 4. The applicants submitted that the Commissioner “cannot make an assessment of a tax liability where he is prevented from recovering the liability” and that “[t]here is no utility in making the assessment”, referring to Commissioner of State Revenue v ACN 005 057 349 Pty Ltd [2017] HCA 6; 261 CLR 509 at [12] (Kiefel and Keane JJ).

153    As things presently stand, the Commissioner is not “prevented from recovering the liability”. The applicants have commenced proceedings in this Court in which they contend that the Commissioner is in breach of the Settlement Deed. Those proceedings have been stayed for the time being and have therefore not been judicially determined. Such claims could not have been determined by the Tribunal and could not have been determined as part of its review of whether the assessments were excessive. The question whether there is “utility in making the assessment[s]” therefore does not arise. In any event, an assessment is not shown to be excessive by establishing that the issue of it is “inutile”.

This Court should not make additional factual findings

154    The applicants contended that this Court should make factual findings concerning the correct operation of the Settlement Deed: AS[121]–[122]. The discretionary power to make findings of fact on an appeal on a question of law should not be exercised for two principal reasons. First, the Tribunal is not shown to have erred on a question of law, so the occasion to consider making findings of fact does not arise. Secondly, the correct operation of the Settlement Deed is an issue which necessarily arises in existing proceedings in the original jurisdiction of this Court in which the applicants allege that the Commissioner has breached the Settlement Deed and claims damages calculated by reference to assessments which the applicants contend the Commissioner should not have issued.

CONCLUSION

155    The applications must be dismissed with costs.

Associate:

Dated: 26 November 2025